FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the period ended January 14, 2001; or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _________________ to
________________.
Commission File Number: 0-19797
WHOLE FOODS MARKET, INC.
(Exact name of registrant as specified in its charter)
TEXAS 74-1989366
(State of (IRS employer
incorporation) identification no.)
601 N. LAMAR
SUITE 300
Austin, Texas 78703
(Address of principal executive offices) (ZIP Code)
Registrant's telephone number, including area code:
512-477-4455
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
Yes X No
--- ---
The number of shares of the registrant's common stock, no par value,
outstanding as of January 14, 2001 was 26,702,597 shares.
Page 1 of 11
WHOLE FOODS MARKET, INC. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
Part I. Financial Information
Page
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Item 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited), 3
January 14, 2001 and September 24, 2000
Condensed Consolidated Income Statements (Unaudited),
for the 16 weeks ended January 14, 2001 and January 16, 2000 4
Condensed Consolidated Statements of Cash Flows (Unaudited),
for the 16 weeks ended January 14, 2001 and January 16, 2000 5
Notes to Condensed Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 10
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 10
Signature 11
Page 2 of 11
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WHOLE FOODS MARKET, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCED SHEETS (UNAUDITED) In thousands
January 14, 2001 and September 24, 2000
ASSETS
2001 2000
------ ------
Current assets:
Cash and cash equivalents $ 7,109 395
Trade accounts receivable 22,830 21,836
Merchandise inventories 101,673 93,858
Prepaid expenses and other current assets 37,353 35,632
-------- -------
Total current assets 168,965 151,721
Property and equipment, net of accumulated depreciation and amortization 503,963 468,678
Long-term investments 9,641 9,632
Acquired leasehold rights, net of accumulated amortization 13,451 13,753
Excess of cost over net assets acquired, net of accumulated amortization 69,102 69,867
Other assets, net of accumulated amortization 17,994 17,628
Net assets of discontinued operations 28,921 29,120
-------- -------
$812,037 760,399
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
2001 2000
------ ------
Current liabilities:
Current installments of long-term debt and capital lease obligations 7,890 7,884
Trade accounts payable 58,901 49,985
Accrued payroll, bonus and employee benefits 39,634 37,534
Other accrued expenses 40,389 47,238
-------- -------
Total current liabilities 146,814 142,641
Long-term debt and capital lease obligations, less current installments 324,310 298,070
Other long-term liabilities 12,649 12,531
-------- -------
Total liabilities 483,773 453,242
-------- -------
Shareholders' equity:
Common stock, no par value, 100,000 shares authorized,
27,299 and 27,222 shares issued, 26,703 and 26,466
shares outstanding in 2001 and 2000, respectively 236,709 235,648
Common stock in treasury, at cost (18,686) (23,688)
Retained earnings 110,241 95,197
-------- -------
Total shareholders' equity 328,264 307,157
-------- -------
Commitments and contingencies
-------- -------
$812,037 760,399
======== =======
See accompanying notes to condensed consolidated financial statements.
Page 3 of 11
WHOLE FOODS MARKET, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED INCOME STATEMENTS (UNAUDITED) In thousands, except per
share data
Sixteen weeks ended
January 14 January 16
2001 2000
----------- -----------
Sales $643,435 532,626
Cost of goods sold and occupancy costs 422,917 353,034
-------- -------
Gross profit 220,518 179,592
Selling, general and administrative expenses 185,790 150,639
Amortization expense 1,749 1,565
Pre-opening and relocation costs 2,647 3,630
-------- -------
Operating income 30,332 23,758
Other income (expense):
Interest expense (5,810) (3,477)
Investment and other income 552 460
-------- -------
Income from continuing operation before income taxes and
cumulative effect of change in accounting principle 25,074 20,741
Provision for income taxes 10,030 8,691
-------- -------
Income from continuing operations before cumulative
effect of change in accounting principle 15,044 12,050
Discontinued operations:
Loss from discontinued operations, net of income taxes - (218)
-------- -------
Income before cumulative effect of change
in accounting principle 15,044 11,832
Cumulative effect of change in accounting principle,
net of income taxes - (375)
-------- -------
Net income $ 15,044 11,457
======== =======
Basic earnings per share:
Income from continuing operations before cumulative
effect of change in accounting principle $ 0.57 0.46
Loss from discontinued operations, net of income taxes - (0.01)
Cumulative effect of change in accounting principle,
net of income taxes - (0.01)
-------- -------
Net income $ 0.57 0.44
======== =======
Weighted average shares outstanding 26,569 26,025
======== =======
Diluted earnings per share:
Income from continuing operations before cumulative
effect of change in accounting principle $ 0.54 0.45
Loss from discontinued operations, net of income taxes - (0.01)
Cumulative effect of change in accounting principle,
net of income taxes - (0.01)
-------- -------
Net income $ 0.54 0.43
======== =======
Weighted average shares outstanding, diluted basis 27,855 26,938
======== =======
See accompanying notes to condensed consolidated financial statements.
Page 4 of 11
WHOLE FOODS MARKET, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) In thousands
Sixteen weeks ended
January 14 January 16
2001 2000
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Income from continuing operations $ 15,044 12,050
Adjustments to reconcile income from continuing operations
to net cash flows provided by operating activities:
Depreciation and amortization 21,796 17,924
Loss on disposal of fixed assets (390) (172)
Rent differential 181 429
Change in LIFO reserve 600 459
Interest accretion on long-term debt 2,028 1,928
Tax benefit related to exercise of employee stock options 941 486
Net change in current assets (11,130) (13,160)
Net change in current liabilities 1,889 12,990
-------- -------
Net cash provided by operating activities 30,959 32,934
-------- -------
Cash flows from investing activities
Acquisition of property and equipment (54,720) (44,928)
-------- -------
Net cash used in investing activities (54,720) (44,928)
-------- -------
Cash flows from financing activities
Net proceeds from long-term borrowings 25,000 28,000
Issuance of common stock 6,063 672
Payments on long-term debt and capital lease obligations (787) (193)
Purchase of treasury stock - (13,534)
-------- -------
Net cash provided by financing activities 30,276 14,945
-------- -------
Cash flows from discontinued operations
Net cash provided by (used in) discontinued operations 199 (2,893)
Net increase in cash and cash equivalents 6,714 58
Cash and cash equivalents at beginning of period 395 3,582
-------- -------
Cash and cash equivalents at end of period $ 7,109 3,640
======== =======
Supplemental disclosures of cash flow information:
Interest paid $ 2,468 1,220
======== =======
Federal and state income taxes paid $ 7,258 1,680
======== =======
See accompanying notes to condensed consolidated financial statements.
Page 5 of 11
WHOLE FOODS MARKET, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
January 14, 2001
(1) BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of Whole
Foods Market, Inc. and subsidiaries ("Company") have been prepared in accordance
with generally accepted accounting principles for interim financial statements
and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In the
opinion of management, all adjustments, consisting of normal recurring accruals,
considered necessary for a fair presentation have been included. Certain
information and footnote disclosure normally included in annual financial
statements prepared in conformity with generally accepted accounting principles
have been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10K for the fiscal year ended September 24,
2000.
The Company's fiscal year ends on the last Sunday in September. The first fiscal
quarter is sixteen weeks, the second and third quarters each are twelve weeks
and the fourth quarter is twelve or thirteen weeks.
(2) EARNINGS PER SHARE
The computation of basic earnings per share is based on the number of weighted
average common shares outstanding during the period. The computation of diluted
earnings per share includes the dilutive effect of common stock equivalents
consisting of common shares deemed outstanding from the assumed exercise of
stock options. A reconciliation of the denominators of the basic and diluted
earnings per share calculations follows (in thousands):
Sixteen weeks ended
January 14 January 16
2001 2000
------ ------
Denominator for basic earnings per share:
weighted average shares 26,569 26,025
Additional shares deemed outstanding from the assumed
exercise of stock options 1,286 913
------ ------
Denominator for diluted earnings per share: adjusted
weighted average shares and assumed exercises 27,855 26,938
====== ======
The computations of diluted earnings per share for the sixteen week periods
ended January 14, 2001 and January 16, 2000 do not include options to purchase
approximately 1,108,000 shares and 1,395,000 shares, respectively, of common
stock because to do so would be antidilutive. The computations of diluted
earnings per share for both periods presented do not include approximately
1,643,000 shares of common stock related to the zero coupon convertible
subordinated debentures because to do so would be antidilutive.
Page 6 of 11
(3) DISCONTINUED OPERATIONS
In November 2000, the Company adopted a formal plan to sell the NatureSmart
(formerly Amrion, Inc.) business of manufacturing and direct marketing of
nutritional supplements. The NatureSmart business has been segregated from
continuing operations and reported as discontinued operations in the
accompanying consolidated financial statements. The loss on disposition of the
NatureSmart business reported at September 24, 2000 included the writedown to
estimated net realizable value of the business being discontinued, costs
associated with the planned disposal and the estimated loss from operations of
the discontinued business through the expected date of disposition. For the
sixteen weeks ended January 14, 2001, the NatureSmart discontinued operations
had no impact on the Company's income statement. For the sixteen weeks ended
January 16, 2000, the loss from NatureSmart discontinued operations totaled
approximately $218,000, net of income taxes of approximately $123,000.
The assets and liabilities of NatureSmart, which have been reflected on a net
basis on the consolidated balance sheets, are summarized as follows (in
thousands):
January 14 September 24
2001 2000
---------- ------------
Current assets $10,895 11,392
Long-term assets 29,187 29,187
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Total assets 40,082 40,579
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Current liabilities 11,161 11,459
Long-term liabilities - -
------- ------
Total liabilities 11,161 11,459
------- ------
Net assets of discontinued operations $28,921 29,120
======= ======
(4) ADOPTION OF ACCOUNTING STANDARDS
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133") in June 1998 as amended by SFAS No. 138, which was
issued in June 2000. SFAS No. 133 establishes reporting standards for derivative
instruments and hedging activities that require an entity to recognize all
derivatives as assets or liabilities measured at fair value and is effective for
financial statements issued for all fiscal quarters of fiscal years beginning
after June 15, 2000. If certain conditions are met, a derivative may be
specifically designated as a hedge of the exposure to changes in the fair value,
variable cash flow, or foreign currency of a recognized asset or liability or
certain other transactions and firm commitments. We adopted SFAS No. 133 in the
first quarter of fiscal year 2001. The adoption of SFAS No. 133 did not have any
impact on the Company's consolidated financial statements.
Page 7 of 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS - Sixteen weeks ended January 14, 2001 compared to the
same period of the prior year.
GENERAL
The Company reports its results of operations on a fifty-two or fifty-three week
fiscal year ending on the last Sunday in September. The first fiscal quarter is
sixteen weeks, the second and third quarters each are twelve weeks and the
fourth quarter is twelve or thirteen weeks. The following table sets forth the
Company's results of operations data expressed as a percentage of sales:
Sixteen weeks ended
January 14 January 16
2001 2000
---------- --------
Sales 100.0% 100.0%
Cost of goods sold and occupancy costs 65.7 66.3
----- -----
Gross profit 34.3 33.7
Selling, general and administrative expenses 28.9 28.3
Amortization expense 0.3 0.3
Pre-opening and relocation costs 0.4 0.7
----- -----
Operating income 4.7 4.5
Other income (expense):
Interest expense (0.9) (0.7)
Investment and other income 0.1 0.1
----- -----
Income from continuing operations before income taxes and
cumulative effect of change in accounting principle 3.9 3.9
Provision for income taxes 1.6 1.6
----- -----
Income from continuing operations before cumulative
effect of change in accounting principle 2.3 2.3
Discontinued operations:
Loss from discontinued operations, net of income taxes 0.0 0.0
----- -----
Income before cumulative effect of change in
accounting principle 2.3 2.2
Cumulative effect of change in accounting principle,
net of of income taxes 0.0 (0.1)
----- -----
Net income 2.3% 2.2%
===== =====
Figures may not add due to rounding.
SALES
Sales from continuing operations totaled approximately $643 million for the
sixteen weeks ended January 14, 2001. This increase of approximately 21% over
sales of approximately $533 million for the same period of the prior year is due
to the addition of eighteen new and acquired stores to the store base over the
last year and comparable store sales increases of approximately 7.3%. Comparable
store sales increases for the first quarter of the prior fiscal year were
approximately 9.7%. Comparable store sales were negatively impacted by tougher
than expected holiday comparisons. Through the eleventh week of the quarter,
comparable store sales were averaging 8.6%, but only averaged 4.2% for the four-
week period around the Christmas and New Year's Eve holidays. In the prior year,
comparable store sales averaged 12.5% for that same four-week period. Sales of a
store are deemed to be comparable commencing in the fifty-third full week after
the store was opened or acquired. Sales in identical stores, which excludes
relocations, increased approximately 6.5%. Comparable and identical store sales
increases generally result from an increase in average transaction amounts and
in the number of customer transactions, reflecting an increase in market share
as the stores mature in a particular market.
Page 8 of 11
GROSS PROFIT
Gross profit consists of sales less cost of goods sold and occupancy costs plus
contribution from non-retail distribution and food preparation operations. The
Company's consolidated gross profit from continuing operations as a percentage
of sales was approximately 34.3% for the sixteen weeks ended January 14, 2001
compared to approximately 33.7% for the same period of the prior fiscal year.
This increase reflects increased national buying and private label initiatives
which continue to lower the cost of product purchased on a national basis,
increased percentage of sales in certain regions and departments where the
Company achieves higher gross profits, and continued improvement in store
execution with respect to product procurement, merchandising and controlling
spoilage. Gross profit for the first quarter of fiscal year 2001 was negatively
impacted by higher than expected utility costs, which increased approximately 15
basis points over the prior year.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses from continuing operations as a
percentage of sales were approximately 28.9% for the sixteen weeks ended
January 14, 2001 compared to approximately 28.3% for the same period of the
prior fiscal year. This increase was due to higher direct store expenses as a
percentage of sales at new and acquired stores added over the last year. Direct
store expenses as a percentage of sales at existing stores for the sixteen weeks
ended January 14, 2001 were consistent with the same period of the prior fiscal
year.
AMORTIZATION
Amortization expense consists primarily of costs associated with the
amortization of excess of cost over net assets acquired and non-competition
agreements. Amortization expense from continuing operations as a percentage of
sales was approximately 0.3% for both the sixteen week periods ended January 14,
2001 and January 16, 2000.
PRE-OPENING AND RELOCATION COSTS
Pre-opening costs include costs associated with hiring and training personnel,
supplies and certain occupancy and miscellaneous costs related to new locations.
The AICPA issued SOP 98-5, "Reporting on the Costs of Start-up Activities" in
April 1998. SOP 98-5 requires costs of start-up activities and organization
costs to be expensed as incurred. We adopted SOP 98-5 effective the beginning of
the first quarter of fiscal year 2000. In accordance with SOP 98-5, in the
first quarter of fiscal year 2000 we reported the cumulative effect of a change
in accounting principle, a one-time charge totaling approximately $375,000, net
of approximately $272,000 of taxes, representing start-up costs capitalized at
September 26, 1999. The adoption of SOP 98-5 did not have a material impact on
our consolidated financial statements. Relocation costs consist of moving costs,
remaining lease payments, accelerated depreciation costs and other costs
associated with replaced facilities and other related expenses. Pre-opening and
relocation costs for the sixteen weeks ended January 14, 2001 consist primarily
of costs associated with the openings of three new stores during the first
quarter and development of nine new stores scheduled to open in future periods.
In the prior year, pre-opening and relocation costs for the sixteen weeks were
associated with the openings of five new stores during the quarter and two new
stores opened subsequent to the end of the first quarter.
INTEREST EXPENSE
Interest expense consists of costs related to the convertible subordinated
debentures, senior notes payable and bank line of credit, net of capitalized
interest associated with new store development. Net interest expense for the
sixteen weeks ended January 14, 2001 totaled approximately $5.8 million compared
to approximately $3.5 million for the same period of the prior fiscal year.
These increases are due primarily to additional amounts outstanding under the
Company's bank line of credit in fiscal 2001. Capitalized interest for the
sixteen weeks ended January 14, 2001 totaled approximately $0.8 million compared
to approximately $1.0 million for the same period of the prior fiscal year.
INVESTMENT AND OTHER INCOME
Investment and other income for the sixteen week periods ended January 14, 2001
and January 16, 200 totaled approximately $0.6 million and approximately $0.5
million, respectively. Investment and other income consists primarily of
interest, rental and other income.
Page 9 of 11
DISCONTINUED OPERATIONS
In November 2000, the Company adopted a formal plan to sell the NatureSmart
(formerly Amrion, Inc.) business of manufacturing and direct marketing of
nutritional supplements. The NatureSmart business has been segregated from
continuing operations and reported as discontinued operations in the
accompanying consolidated financial statements. The loss on disposition of the
NatureSmart business reported at September 24, 2000 included the writedown to
estimated net realizable value of the business being discontinued, costs
associated with the planned disposal and the estimated loss from operations of
the discontinued business through the expected date of disposition. For the
sixteen weeks ended January 14, 2001, the NatureSmart discontinued operations
had no impact on the Company's income statement. For the sixteen weeks ended
January 16, 2000, the loss from NatureSmart discontinued operations totaled
approximately $218,000, net of income taxes of approximately $123,000.
LIQUIDITY AND CAPITAL RESOURCES AND CHANGES IN FINANCIAL CONDITION
At January 14, 2001 and September 24, 2000, our working capital was
approximately $22 million and $9.1 million, respectively, and the ratio of
current assets to current liabilities was approximately 1.15 to 1 and 1.06 to 1,
respectively. Net cash provided by operating activities was approximately $31.0
million and $32.9 million and net cash provided by financing activities was
approximately $30.3 million and $14.9 million for the sixteen weeks ended
January 14, 2001 and January 16, 2000, respectively.
Whole Foods Market's principal capital requirements have been the funding of the
development or acquisition of new stores and to lesser extent, the resultant
increase in working capital requirements. We estimate that cash requirements to
open a new store will range from $3 million to $12 million (after giving effect
to any landlord construction allowance). This excludes new store inventory of
approximately $750,000, a portion of which is financed by our vendors. As of
February 13, 2001 we had signed leases for 22 new stores averaging approximately
34,000 square feet in size. We expect to open or acquire 15 to 20 new stores per
year, including relocations of existing stores, in each of the next two fiscal
years. We will incur additional capital expenditures in the current fiscal year
in connection with ongoing equipment upgrades and resets at existing stores and
continued development of management information systems. Net cash used in
investing activities was approximately $54.7 million and $44.9 million for the
sixteen weeks ended January 14, 2001 and January 16, 2000, respectively. We
expect that planned expansion and other anticipated working capital and capital
expenditure requirements will be funded by cash generated from operations and
long-term debt. We continually evaluate the need to establish other sources of
working capital and will seek those considered appropriate based upon the
Company's needs and market conditions.
RISK FACTORS
We wish to caution you that there are risks and uncertainties that could cause
our actual results to be materially different from those indicated by forward-
looking statements that we make from time to time in filings with the Securities
and Exchange Commission, news releases, reports, proxy statements, registration
statements and other written communications, as well as oral forward-looking
statements made from time to time by representatives of our Company. These risks
and uncertainties include, but are not limited to, those listed in the Company's
Annual Report on Form 10-K for the year ended September 24, 2000. These risks
and uncertainties and additional risks and uncertainties not presently known to
us or that we currently deem immaterial may cause our business, financial
condition, operating results and cash flows to be materially adversely affected.
Except for the historical information contained herein, the matters discussed in
this analysis are forward looking statements that involve risks and
uncertainties, including but not limited to general business conditions, the
timely development and opening of new stores, the impact of competition, our
ability to dispose of the NatureSmart business through the sale of our ownership
of its operating units and assets as planned and other factors which are often
beyond the control of the Company. The Company does not undertake any obligation
to update forward-looking statements except as required by law.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the Company's market risk exposures from
those reported in our Annual Report on Form 10-K for the year ended September
24, 2000.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the fiscal quarter ended
January 14, 2001.
Page 10 of 11
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WHOLE FOODS MARKET, INC.
Registrant
Date: February 27, 2001 By: /s/ Glenda Flanagan
------------------ -------------------
Glenda Flanagan
Vice President and
Chief Financial Officer
(Duly authorized officer and
principal financial officer)
Page 11 of 11